Tuesday, December 25, 2012

Introduction

In this article I will offer some of my own predictions for what the future holds, with regard to energy supplies. I have three reasons for doing this. First, I wish to provide an alternative set of predictions which does not commit any of the errors of the peak oil camp. Second, I wish to provide a set of predictions which does not assume either business as usual OR collapse, thereby avoiding the "either-or" thinking prevalent in peak oil circles which posits that either business as usual must continue (impossible) or we must collapse to a pre-industrial state. Third, I wish to counteract the notion (very common in peak oil circles) that economists or students of economics assume that the world is infinite or extends to infinity in all directions, or that new resources magically appear as a consequence of demand. By offering these predictions, I hope to provide material which hasn't been considered by peak oil adherents, because of their unfortunate tendency to ascribe magic-infinite beliefs to all those who do not accept their conclusions.

Unfortunately, I cannot give all my reasons for believing the predictions I'll put forth here. Each prediction would require an essay-length treatment. For example, my prediction regarding ocean shipping would require an explanation of the basic physics of ships, of the alternative fuels available, of the time required to build a new fleet of ships, of capital expenses, of the methods that ship buyers use to calculate the size and speed of new ships, of basic optimization problems, and so on.

Although I can't give a fully detailed explanation of my reasons (because I don't write peak oil blogs for a living), I still can give my reasons in overview, or explain briefly why I think something is the case. For example, I can explain that ship builders could easily build ships that are more than 5x as fuel-efficient as today, but it only becomes cost-effective to do so when fuel is more expensive than now; that ship builders pick the most cost-effective ship given their anticipations about the future prices of fuel; that we have more than enough time to transition the shipping fleet to more efficient ships; and that these things imply that ocean shipping will not increase by more than 15% in the long run because that is how much the costs would increase with a tripling of oil prices, and if oil prices increased by more than that then shipping companies would switch to alternative fuels like anhydrous ammonia which do not require any fossil fuels. This degree of explanation is possible here.

I will offer basic reasons along with each of my predictions. In some cases, I will leave out the basic explanation when I feel it's fairly obvious.

With that in mind, here are my predictions for the future.

Predictions

Oil production will peak and start declining some time in the next 12 years (before 2025). I gather this figure from Jean Lahererre. Please note that prior predictions from peak oil pessimists, and from people using linearization methods, have been quite incorrect. Nevertheless, I will make a worst-case assumption here, and will assume that peak oilers finally get it right. Once the declines begin, oil will decline at less than 1% per year for the first decade or more.

Similarly, coal and natural gas will both peak before 2100 and will decline gradually thereafter.

A few years before the peak of oil, speculators will detect that oil production is nearing its peak. The speculators will immediately bid up the price of oil to over $200/barrel*. This could happen fairly rapidly, like within 2 years. Speculators will bid up the price of oil to what they believe the longer-term price will be. Speculators do this because they make money by anticipating things, thereby moving forward the date of price increases, and prompting the transition to alternatives long before any declines have actually occurred. I'll assume (for simplicity and convenience) that gasoline will cost $7/gal* after at the pump after the initial increase, in the USA, and will cost more in European countries where petrol taxes are higher. It's possible that the price of gasoline will briefly go higher than this.

Once the price of oil has increased, the world economy will accelerate its gradual shift from oil to other sources of energy for transportation. Also, the world economy will accelerate its gradual shift to more fuel-efficient kinds of transportation. Ships will become larger and slower, and thereby much more fuel-efficient. Trains will displace trucks to some extent, and new track will be laid. Cars will become more fuel efficient. Plug-in hybrids will become common. Eventually, transportation will be electrified. This is because the entire economy automatically and always transitions to the next-best alternative when something becomes too expensive.

The price of oil will eventually level off and will never go higher than $200/barrel* for long, because prices higher than that will cause car makers to switch to battery-electric drivetrains, thereby driving the price back down. Higher prices will also cause cargo carriers to switch fuels, electrify, and switch modes (like from trucks to trains), thereby driving the price back down.

Once oil has been declining for a few years, further declines will be accompanied, simultaneously, by improved efficiency, fuel switching, and greater electrification. The long-term price of oil will hover around the cost of its next-best alternative energy source and carrier (batteries in cars), continuously, until oil is nearly exhausted, 100+ years from now. There may be temporary periods of higher prices, however the price of oil will always ultimately revert to the cost of its next best alternative energy source and carrier.

In the long run, the economy will adjust in the best manner possible to much higher oil prices. This is not the same as saying that resources are infinite. It implies that people will drive plug-in hybrids and will end up paying modestly more for personal transportation. Cargo shipping will cost slightly more. That is all.

More detailed predictions

I wish to go into further detail about these predictions. However, from this point forward it will be necessary to divide my predictions into SHORT-RUN and LONG-RUN predictions. By SHORT-RUN I mean that period of time which is shorter than the replacement time for the auto fleet (like 15 years), plus the amount of time necessary to shift production lines to more efficient cars. By LONG-RUN I mean that period after all transportation sectors have turned over their fleet of engines, ships, cars, trains, etc.

It's necessary to divide predictions into short-run and long-run predictions, because there will be a period during which we transition to a more efficient transportation infrastructure. There will be a period during the transition, and a period after the transition, and the economy will look different during these two periods. After declines have begun, however, car manufacturers will anticipate further declines.

There will be a transition period because people and firms will not correctly anticipate the date of peak oil or the amount of price increases. This is because the exact date of peak oil is essentially uncertain, and also because consumers do not anticipate things, but essentially just respond to changing circumstances as they occur.

The short-run effects of high oil prices

In the short run, the abrupt increase in oil prices, caused by speculators, will trigger a nasty recession.

The world economy will eventually recover from the recession and continue growing even though oil prices will never return to their prior levels, and even though oil production will never again increase to its prior levels. Economic growth does not require increasing oil extraction.

At that point, car manufacturers will scramble to increase production of ultra-light cars, hybrids, plug-in hybrids, electrics, etc. Car manufacturers will take more than 5 years to shift their production to more fuel-efficient cars. Car manufacturers will "aim ahead" and will transition to producing cars which they think are appropriate for the longer run, given further gradual declines in oil supplies. This is because firms attempt to anticipate, just like with the Y2K bug. They may be imperfect at this, but they will anticipate further declines once declines have begun.

During the transition to more fuel-efficient cars, many people will be stuck with old gas guzzlers which are then obsolete. There will be an "interim period" of about 10 years during which many people drive old cars which get less than 30 mpg. Some of these people will need to curtail discretionary travel, like long-distance road trips, because fuel will be too expensive. Those people will need to drive somewhat less until they can replace their gas guzzlers with new and more fuel-efficient cars. Eventually (within 14 years) most of the car fleet will have shifted to much more fuel-efficient cars, and to plug-in cars. At that point, if there are further declines in oil supplies which are more rapid than car manufacturers had anticipated, then a few consumers will have to curtail discretionary longer-distance transportation (in other words, they will be limited to the range of their batteries some of the time).

The long run-effects of high oil prices (30 years after the peak)

In the long run (30 years after the peak) the entire transportation infrastructure will have been converted to more efficient modes of transportation, and to alternative energy sources.

In the long run, $7/gal* gasoline will make very little difference for first-world living standards. The economy will adjust to higher oil prices. Cars will require far less gasoline to travel a given distance, and will be able to travel a considerable distance without any gasoline at all. When this transition has occurred, the nastiest effects of peak oil will have passed.

In 30 years, personal transportation will be modestly different. A few more people will take public transportation. Most drivers will have plug-in hybrids that look like priuses.

The total cost of automobile transportation will be slightly higher than today. After the car fleet has transitioned to plug-in hybrids, the average person will pay about $50/month* more for driving a car than they do now, even with $7/gal* gasoline. This figure of $50/month increase is derived from the additional cost which prius-like plug-in hybrids impose, assuming that battery costs come down somewhat as a result of both mass manufacture and technological innovation, and that gasoline costs $7/gal* and people drive 1000 miles per month, on average. (People will drive 750 miles per month using batteries and 250 miles using gasoline. The cars will get 60 mpg when using gasoline, so gasoline costs will be $30/month, plus another $40/month for electricity, which is much cheaper than we pay for fuel now. However, the savings on fuel will be more than offset by a $6000 increase in the cost of the car).

Cargo transport by sea will be change a bit. Shipping companies will switch to ships which are much larger, and which travel at 2/3rds the speed of current ships. Shipping companies will do this because they are always replacing old ships with the most cost-effective new ships for what they anticipate fuel costs will be for the next 20 years. These decisions will cause a 60% reduction in fuel consumption per tonne-mile, while increasing the capital expenses of the shipping fleet by a modest amount. The ultimate result will be a very small increase (less than 15%) in shipping costs, per tonne-mile.

The figure for cost increases (~15%) is easily derived by looking at the additional capital cost of ships which use 1/3rd the fuel, and assuming 3x more expensive fuel and slightly higher operating expenses. You can look up a few basic figures and then solve a basic optimization problem using Calculus 1 to figure it out. I have not bothered to do this, however I can "eyeball estimate" what the approximate result would be. Shipping companies will figure it out since they know more about the topic than you and I, and they carry out optimization problems like that routinely. Their price of fuel will never increase by more than 3x in the long run since synthetic fuels are then much cheaper, thereby encouraging switching and driving down the price of oil, and this implies that total costs for ocean shipping will not increase beyond 15% in the long run.

Shipping companies may also switch fuels at some point, to natural gas or to coal (with steam turbines).

Cargo transport by land will change a bit. More cargo will be transported by rail, and less by truck, because rail uses about 1/4th the energy per tonne-mile. New rail will be laid. Trucks may have 3 or 4 trailers and may travel at slower speeds, thereby reducing fuel consumption. Other innovations are possible, such as trolley-trucks. Some rail ways will be electrified. Ultimately, costs of cargo transport by land will increase modestly, but definitely not more than 25% per tonne-mile.

The increases in shipping costs (both land and ocean) will cause negligible increases in the cost of transported goods. For example, a pair of shoes will cost about $0.15* more. Food will cost very slightly more.

Plastic will become more expensive and rarer. Food packagers will switch to other materials, such as glass bottles, aluminum cans, cardboard boxes, etc. Clothing and toy manufacturers will switch to other materials, such as silicone, rubber, canvas, and other materials not derived from fossil fuels.

Air travel will be considerably more expensive than today, perhaps more than 40% more expensive. This will be the most visible and dramatic long-term effect of declining oil supplies.

Competition from Chinese people for oil supplies will cause far more rapid declines in the supplies available to Westerners during the next 20 years than any geological constraints.

Ultimately, we have the technology available to us today, to reduce fuel consumption by more than half without any reduction in miles traveled per person, or or any reduction in cargo tonne-miles. We could simply switch car production to prius-like cars (thereby doubling mpg) and use more trains and larger ships. The market economy will optimize a solution which is at least as good as this.

The very long-run effects of fossil fuel depletion (After all fossil fuels have been exhausted, 100+ years from now)

People will ride in battery-electric cars. Energy for the cars will come from solar power plants, wind turbines, and nuclear power plants.

Electric power generation will shift to nuclear plants and renewable plants. This will happen smoothly and without any major disruption, since the entire fleet of power plants will be replaced several times in the interim, and power companies order new plants based upon anticipation of the cost of fuel over the next 20 years. Prices for electricity will probably be lower than today, because renewable energy costs are decreasing over time and already are not much higher than prices for fossil fuel plants.

Total energy production worldwide will be far higher than today, despite a concomitant decline of fossil fuels. This is because China and India are growing rapidly and ultimately do not require any fossil fuels to continue that growth.

Ships will use anhydrous ammonia for fuel, I would guess (speculative). The ammonia will be derived from wind power, taken from stranded wind resources. Overall, ocean shipping will cost slightly more than it does today.

Truck transportation will be rarer. There will be far more rail in the world, and far less truck transportation. Very large retail outlets (like Wal-Mart etc) might have their own rail terminals (obviously this is very speculative).

Housing will have better insulation and will make greater use of "passive heating" techniques.

The world economy will have gone through many recessions. Each time, the economy will recover, and will continue growing despite a near-total exhaustion of all fossil fuels.

The average temperature of the surface of the earth will be 4 degrees centigrade warmer.

In 100 years, most people in the world will have first-world living standards, despite the exhaustion of fossil fuels. Fossil fuels are not needed for economic growth. In fact, fossil fuels are not needed for any purpose. They are the cheapest fuels right now. That is all.

No Disruptions Will Ever Occur

Most importantly. There will NEVER BE ANY MAJOR DISRUPTION to industrial civilization as a result of declining supplies of fossil fuels. More specifically, there will never be any major disruption to food supplies, food transport, electricity production, or any other essential thing, in any industrialized country, as a result of declining fossil fuel supplies.**

The economy transitions to alternatives when it's appropriate to do so. There are alternatives for every use of fossil fuels, and the economy will use them when the time is right. The economy transitions very reliably, like clockwork. It is always transitioning, even right now, and it will continue to do so as fossil fuels decline.

Long-distance transport of goods will never end. Long-distance transport consumes less than 5% of all oil supplies now, so it wouldn't be sacrificed during the next 100 years even if oil were the only possible fuel. However, oil is not the only possible fuel, since ships and trains can easily use other fuels such as synthetic fuels or electrification (for trains). As a result, there is more than enough time to transition (100+ years), and more than enough alternatives to do so.

Industrial growth will continue despite the decline of fossil fuels. This is because fossil fuels are not needed for industrial growth. Growth could occur with any source of energy which returns more than was required to obtain the energy. For example, it is entirely possible to use a single solar thermal plant to smelt the ores, melt the glass, and manufacture the synthetic fuels needed to build five more solar thermal plants, and so on. As a result, industrial growth does not require any fossil fuels and has never required any. Fossil fuels were selected first because they were cheapest.

The economy has more than ten times as much time as required to transition to alternatives, while avoiding any disruption of essential services. In fact, the economy could reduce its consumption of oil by 90% within 10 years without any risk of collapse. Transitioning that quickly would impose severe restrictions on personal travel in the interim (such as fuel rationing) until new vehicles were built, but would pose no risk of collapse. There are two reasons the economy would avoid collapse in this case: 1) the economy sacrifices the most important things last; and 2) the economy starts transitioning right away to alternatives. Thus, even if we underwent a 90% reduction in oil supplies over ten years, there would be absolutely no risk of collapse, because 10% oil supplies are more than enough to provide essential services (~3% for tractors, food transport, public transport) and to provide for the remainder of the transition at the same time (building an electric transportation infrastructure).

I realize this point requires far more elaboration. Look at it this way: look up the amount of energy used by truly essential purposes in the US economy (i.e. food production and transport, etc). Could you devise a way to transition to trolley-buses and trolley-trucks throughout suburbia while continuing essential services? Try to think of ways to avert collapse with 10% oil supplies. What if you banished all personal auto transport, except to and from work in carpools? What if you diverted all construction resources to rapidly putting up wooden poles (like old telephone poles) with cables strung between them for trolley buses, throughout suburbia? If this were done in parallel everywhere, and you employed 25% of the population in doing only that, how long would it take to have working trolley-bus service almost everywhere? How much steel is made right now, and how much electrical cable could be built per year for the trolley buses? If all lumber were diverted to poles, how many could we make? Wouldn't it be possible to convert the densest suburban areas to electrical transport first, within a few years, thereby freeing up some of the 10% oil supplies for additional purposes almost right away? Couldn't we replace the wooden poles with sturdier structures once the new infrastructure was going? Also, could we build natural gas cars for rural residents within 10 years? How many cars do we build now, and how different are natural gas cars? How long would it take us to build synthetic fuel plants, at the same time as our trolley-bus system? Could that also be done with the 10% oil budget? The answers to these questions are fairly basic. We could build enough of an alternative transportation infrastructure within a few years. We could produce enough steel, poles, and trolley-buses within 3 years to transition enough of the economy to an alternative transportation infrastructure. Not to mention, we could start mass-manufacture of natural gas vehicles almost right away since they are nearly identical to the vehicles constructed now. These sudden changes would be at massive cost, and tremendous inconvenience, and would require the abandonment of much capital equipment; but it would avoid any possibility of collapse. Bear in mind that the petroleum shortage would start easing as soon as any fraction of our hypothetical alternative infrastructure was complete.

If you can figure out a way to avoid collapse, off the top of your head, the economy will do that or something better. The economy is like a giant learning machine. It optimizes, evolves, and finds solutions. That is how our economy got to this point. That is how the network of rail lines, mines, factories, suppliers, sub-contractors, fiber optic lines, retail stores, etc, developed in the first place and operates now. If the economy were so stupid that it cannot manage a simple optimization and reallocation problem, then the economy would collapse within a month, regardless of peak oil. The problems entailed by just operating the economy now, are vastly more complicated and difficult than the problems of adjusting to peak oil.

Again, there will not be any disruption of essential services in first-world countries due to peak oil. Anyone who claims there will be, is badly misunderstanding the speed with which the economy could adjust, how it adjusts, the alternatives available, and the likely pace of fossil fuel declines. Any serious analysis of these matters would not permit even the minutest chance of collapse due to fossil fuel declines.

Alternative Possibilities

Of course, I can't really predict the future. I'm relying upon certain assumptions while making predictions, and those assumptions may turn out to be incorrect. If some of my assumptions are incorrect, then obviously my predictions above would be incorrect to some extent also.

My major assumptions are as follows.

First, I am assuming that we don't suffer unpredictable disasters like a nuclear war, or an emergent disease which kills of 90% of the population, or a meteor strike which decimates the biosphere, or any other similar disaster. Things like that are non-linear and essentially impossible to anticipate. Obviously if any of them occurred, then we could have an interruption to civilization. I am only claiming that fossil fuel depletion will never cause any interruption.

Second, I have assumed that oil will soon peak and decline. In effect, I have graciously granted this point, and am willing to accept the prognostications of ASPO and Jean Laherrere about future oil production. I should point out, however, that their prior predictions have been overly pessimistic, and quite incorrect. Also, their predictions are controversial. There are petroleum analysts who believe we'll be able to exploit the massive resources of unconventional oil such as tar sands and shale. Were this to happen, then petroleum prices might inch up gradually over decades (in fits and spurts, to be sure) and the economy would face only a gradual transition to alternatives, without the irritating "transition period" described above. In this case, auto manufacturers would have more than enough time to transition production to more efficient cars, and there would never be any irritating "transition period". In this case, my predictions above would be too pessimistic, and we might never face anything more severe than slight recession and modestly higher prices as we transition to alternatives to oil.

Third, I have assumed that there will be no major technological developments in the ensuing years. To be more specific, I have assumed that batteries and other energy storage devices remain at their present level of development. Clearly, this may not be true. Someone may invent the better battery one day, and I have no way of predicting whether this will occur. If a better battery were invented, then the economy could transition off of oil before the peak even occurs, in which case peak oil would be a complete non-event of no interest to anybody except toy manufacturers and airlines, who would then face a century-long transition to other materials or fuels. Or, if the better battery were invented after peak oil, then we could return to "energy guzzling" cars again.

Summary

Oil may peak and decline before 2025.

If that happened, oil prices would increase fairly rapidly to over $200/barrel.

In the SHORT RUN, this would cause:

A nasty recession

An "interim" period, during which some vehicles are "gas guzzlers" relative to what is then required. This "interim period" will last until the car fleet can be transitioned to plug-in hybrids.

People who own these "gas guzzlers" will need to curtail discretionary travel, and drive less, until they can buy a more fuel-efficient car.

In the LONG RUN, peak oil will cause:

Very little difference.

People will drive prius-like plug-in hybrids

People will pay about $50/month* more for car transportation.

Slight (meaning barely perceptible) increases in the cost of goods due to increased shipping costs

Plastic will be rarer for food packaging, cases for electronics, and toys. Other materials (silicone, aluminum, paper, cardboard, glass) will become more common for these purposes.

In the VERY LONG RUN, the exhaustion of all fossil fuels will cause:

Very little difference in day-to-day living compared to continued fossil fuels. Obviously there will be major technological changes in that time, but most changes in day-to-day living won't be imposed by declining supplies of fossil fuels.

Energy and transportation prices will be slightly higher _per person_

Energy will come from renewable sources

There will never be any major disruption, to any essential services, in any
industrialized country, over any time period, due to declining fossil fuel supplies

The economy adjusts rationally to declining fossil fuel supplies

We have more than 10x longer than would be required to adjust to declining fossil fuels

Peak oil poses absolutely no risk of collapse

If APSO's projections about oil supplies are incorrect, and we exploit the large amount of unconventional oil resources, then the transition away from oil could be very gradual and may never pose any difficulty more serious that mild recession and modestly higher prices.

* Throughout this article, the prices quoted are in 2012 US Dollars. Obviously they could be much higher in the future because of inflation.

** Of course there will be transient disruptions to electricity grids, etc. There will be brown outs and other things, which happen all the time and have always happened. I'm claiming there will be no sustained, severe interruption.
*** NOTE: I made several minor modifications to this article as of July, 2013, as follows: I took a more negative stance on the prior predictions of ASPO etc in light of recent events. I also clarified the section about the interim period, by adding the word "discretionary".